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Is Your Cash Working Hard Enough? A Guide to Investing and Reserves

With high inflation, rising interest rates, fears of a recession, and difficult markets, the recent economic environment has done few favors for officers and directors of nonprofit organizations. But there has been a bright spot. The interest rate available on cash reserves has soared. The yield on government money market funds now sits at 4.4%, and it may go higher if the Fed continues raising rates.*

Unfortunately, the interest many banks pay on checking and savings accounts has lagged far behind. And every dollar counts. After all, that additional interest income could fund another program or a much-needed staff member. For many nonprofit fiduciaries, the question becomes, “is our cash working hard enough?”

For those enviable organizations holding cash reserves that exceed their operating needs, there’s another dilemma. Maintaining a cushion is prudent, but it comes at a cost. Idle funds lose purchasing power to inflation, and excess cash not invested in support of the mission may discourage further gifts from donors. Ultimately, many nonprofits and associations struggle to find the sweet spot between operating cash and long-horizon/endowment-like investment pools.

Operating Reserves—How Much Is Too Much?

Rightsizing cash may sound simple but it’s more complicated in practice. When establishing an emergency fund to cover a potential shortfall, most organizations tend to rely on general rules of thumb. What they really need is a custom analysis that weighs the risks of their specific situation. Bernstein’s proprietary tool helps pinpoint an organization’s inherent sensitivity to shortfall risk.

In addition to a rainy-day fund, many organizations reserve for specific capital projects, programs, or extraordinary spending needs that are anticipated in the next few years.

How Should We Invest Those Operating Reserves?

Invest reservers for a period that aligns with when your organization may need to tap the assets. That may mean assuming modestly more risk with certain pools of assets to pursue more reward. Keep in mind, short-term and intermediate-term reserves have different time horizons than cash equivalents or a long-term endowment.

Customize Allocation

Then, customize the allocation for liquidity needs and risk tolerance. This can include:

  • fully liquid cash instruments to support liquidity needs within next 12 months;
  • limited principal risk offset by better-than-cash returns with upside participation for liquidity needs over 1–3-year horizon; 
  • conservative, balanced portfolio with higher expected returns than all bonds with less principal risk than equity-heavy allocation to support future spending needs over 3–5 years.

Document Decisions in an IPS

Lastly, to provide institutional memory, nonprofit fiduciaries should document the decisions made and their rationale in an investment policy statement (IPS). The IPS should outline investment goals, define distinct time horizons, and establish target asset allocations for the various pools of capital. Review and update the IPS regularly to ensure it remains aligned with the organization’s objectives—especially as it relates to socially responsible investing.

In today’s environment, holding the right amount of cash is not as simple as you’d think. Seeking thoughtful advice can help you determine the best way to size and invest your operating reserves. 

Featured image via Unsplash

*As of February 28, 2023

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

About the Authors:

Jason Okrent headshot

Jason Okrent, CFA
Vice President and Financial Advisor

Jason Okrent is a Vice President and Financial Advisor in the Seattle office of Bernstein Private Wealth Management. He is responsible for providing wealth planning advice to individuals, families, nonprofits, and foundations as well as endowments and pension plans. As a member of Bernstein’s Foundation and Institutional Advisory Services team, he works with donors and nonprofits to ensure their investments are aligned with their mission. He works closely with clients and their professional advisors on complex planning issues such as pre-transaction planning, multigenerational wealth transfer, philanthropy, nonprofit governance, retirement planning, and asset allocation. Prior to joining the firm, Jason served as director of investor sales at Integral Development, a company specializing in foreign exchange and digital asset trading. Jason holds a BA in business administration from the University of Washington and is a Chartered Financial Analyst.

Christopher J. Clarkson, CFA
Director — Wealth Strategies

Mr. Clarkson is a Senior Vice President and a Director in Bernstein’s Wealth Strategies Group. As a member of Bernstein’s Foundation and Institutional Advisory Services team, he works with donors and nonprofits nationwide to ensure their finances are best positioned to fulfill their mission. He has expertise in a variety of complex investment planning issues, including charitable giving, selling a business, retirement planning, multigenerational wealth transfer, and diversification of concentrated stock and option portfolios. Mr. Clarkson is a frequent lecturer to groups of tax and legal professionals and charitable organizations throughout the western United States. He has given educational seminars for the Los Angeles Council of Charitable Gift Planners – Western Regional Planned Giving Conference, USC Tax Institute, Advisors in Philanthropy, Colorado Society of CPAs, Hawaii Tax Institute, and Seattle Children’s Hospital Foundation. Mr. Clarkson joined the firm in 1995 and has been a member of the Wealth Strategies Group since 1998. He earned a BA with high honors in business/economics from the University of California, Santa Barbara, and is a Chartered Financial Analyst charter holder.